This week the Global Financial Markets Association (GFMA) published a paper on wholesale central bank digital currencies (wCBDC). It explores the design considerations and use cases from a capital markets perspective. GFMA is the umbrella body for the US (SIFMA), European (AFME) and Asian (ASIFMA) financial markets bodies.
The Boston Consulting Group (BCG) and Clifford Chance, who wrote the paper, came up with five key design building blocks with access as the first one.
“wCBDCs are designed to facilitate wholesale market transactions, with direct access to the wCBDCs limited to regulated financial institutions and PSPs. We and our partners recommend following the current two-tier structure which places central banks at the foundation of the payment system, while assigning end-user-facing activities to financial institutions and other PSPs,” said Roy Choudhury, managing director & partner, BCG.
Access to central bank accounts is currently restricted to highly regulated financial institutions, but some central banks have considered expanding this access. Given a wCBDC is a non-trivial undertaking that carries risks, the paper suggests that initial users should be limited to current central bank account holders. Only once a wCBDC is established and its risks better understood should access expansion be considered.
The other building blocks for a wCBDC include interoperability, legal status, prudential treatment, and risk management.
Interoperability has many dimensions. A wCBDC should be interoperable with:
- existing payment systems
- capital markets and financial infrastructures
- cross border foreign exchange systems
- local retail CBDC
- DLT capital market infrastructures
- (ideally) regional CBDC systems or multi-CBDC (mCBDC) participation
An account-based wCBDC would be simpler to deal with when it comes to legal status, given it’s so similar to current central bank accounts. But a token based digital currency might require new legislation in many jurisdictions.
In terms of prudential treatment, the paper concludes that a wCBDC needs to have the same treatment as current central bank money for Basel III rules.
Apart from the five core design blocks, the issue of programmable money was explored. While many see programmability as very desirable – and for some, the primary goal – the authors also see many risks. One of the more novel ones is the prediction that programmable money might not be considered of equal value to conventional central bank money.
For example, if a wCBDC was in limited supply and superior returns were on offer. Theoretically, that might be the case. However, we’d note that many stablecoins currently offer vastly superior returns (and higher risk) than bank accounts, but because of the ability to redeem or trade them, they still maintain par value.
Finally, three use cases for capital markets were explored including securities settlement, cross border foreign exchange and collateral management.
